Initiated By
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Allegations
SEC ADMIN IA RELEASE 3727, NOVEMBER 26, 2013: THE SECURITIES AND EXCHANGE COMMISSION ("COMMISSION") DEEMED IT APPROPRIATE AND IN THE PUBLIC INTEREST THAT PUBLIC ADMINISTRATIVE AND CEASE-AND-DESIST PROCEEDINGS BE INSTITUTED PURSUANT TO SECTIONS 203(E) AND 203(K) OF THE INVESTMENT ADVISERS ACT OF 1940 ("ADVISERS ACT") AND SECTION 9(B) OF THE INVESTMENT COMPANY ACT OF 1940 ("INVESTMENT COMPANY ACT") AGAINST WILLIAM T. PAYNE ("PAYNE").
THE DIVISION OF ENFORCEMENT ALLEGES THAT: PAYNE, THE CEO OF A REGISTERED INVESTMENT ADVISER, CAUSED ADVISER'S WILLFUL VIOLATIONS OF THE ANTIFRAUD AND COMPLIANCE PROVISIONS OF THE ADVISERS ACT AND THE RULES THEREUNDER.
FROM JULY 2009 THROUGH JULY 2011 ("RELEVANT PERIOD"), ADVISER ENGAGED IN THOUSANDS OF SECURITIES TRANSACTIONS WITH ADVISORY CLIENTS ON A PRINCIPAL BASIS THROUGH AN AFFILIATED BROKER-DEALER WITHOUT PROVIDING PRIOR WRITTEN DISCLOSURE TO, OR OBTAINING CONSENT FROM, THE CLIENTS; AND FAILED TO ADOPT AND IMPLEMENT WRITTEN POLICIES AND PROCEDURES REASONABLY DESIGNED TO PREVENT VIOLATIONS OF THE
ADVISERS ACT.
ADVISER PROVIDES INVESTMENT ADVISORY SERVICES TO INDIVIDUALS AND ENTITIES. ADVISER'S INVESTMENT STRATEGY FOCUSED ALMOST EXCLUSIVELY ON FIXED INCOME SECURITIES, SUCH AS MORTGAGE-BACKED BONDS. TO EXECUTE THIS STRATEGY, ADVISER RELIED ON ITS AFFILIATED BROKER-DEALER FOR FIXED INCOME ANALYSIS AND TRADE EXECUTION.
PAYNE MADE INVESTMENT RECOMMENDATIONS TO ADVISER CLIENTS AND, UPON THE CLIENTS' CONSENT, THE BROKER-DEALER EXECUTES THE TRANSACTIONS. DURING THE RELEVANT PERIOD, THE BROKER-DEALER USED ITS INVENTORY ACCOUNT TO PURCHASE MORTGAGE-BACKED BONDS FOR ADVISER ADVISORY CLIENTS AND THEN
TRANSFERRED THE BONDS TO THE APPLICABLE CLIENT ACCOUNT. THE BROKER-DEALER CHARGED THE ADVISORY CLIENTS A SALES CREDIT FOR THE TRADES, WHICH WAS ESSENTIALLY A PERCENTAGE MARK-UP (OR MARK-DOWN). PAYNE, A REGISTERED REPRESENTATIVE OF THE BROKER-DEALER FOR THE TRADES, RECEIVED 55% OF THE SALES CREDIT GENERATED BY EACH TRADE.
PAYNE IS RESPONSIBLE FOR ENSURING THAT ADVISER COMPLIES WITH ITS REGULATORY REQUIREMENTS, INCLUDING ADVISERS ACT REQUIREMENTS.
FROM JULY 2009 THROUGH JULY 2011, ADVISER, THROUGH THE BROKER-DEALER, ENGAGED IN 2,212 PRINCIPAL TRANSACTIONS WITH ITS ADVISORY CLIENTS WITHOUT PROVIDING PRIOR WRITTEN DISCLOSURE TO CLIENTS THAT IT WOULD EFFECT THE TRADES ON A PRINCIPAL BASIS, OR OBTAINING CONSENT FROM CLIENTS.
THE BROKER-DEALER COLLECTED APPROXIMATELY $1.9 MILLION IN GROSS SALES CREDITS FROM THE ADVISER PRINCIPAL TRANSACTIONS. THE BROKER-DEALER PAID APPROXIMATELY $1 MILLION TO PAYNE AND CO-RESPONDENT FOR THE ADVISER PRINCIPAL TRANSACTIONS WHILE RETAINING THE REST. NONE OF THE GROSS SALES CREDITS WAS PAID TO ADVISER.
PAYNE INITIATED AND EXECUTED THE ADVISER PRINCIPAL TRANSACTIONS. HE KNEW THAT ADVISER DID NOT PROVIDE WRITTEN DISCLOSURES TO, OR OBTAIN CONSENT FROM, ADVISER CLIENTS BEFORE COMPLETING THE ADVISER PRINCIPAL TRANSACTIONS.
DURING THE RELEVANT PERIOD, ADVISER FAILED TO ADOPT AND IMPLEMENT WRITTEN COMPLIANCE POLICIES AND PROCEDURES REASONABLY DESIGNED TO PREVENT VIOLATIONS OF THE ADVISERS
ACT PROVISION REGARDING PRINCIPAL TRANSACTIONS. ADVISER'S COMPLIANCE MANUAL DID NOT CONTAIN ANY POLICIES AND PROCEDURES ADDRESSING PRINCIPAL TRANSACTIONS.
AS A RESULT OF THE CONDUCT, PAYNE CAUSED ADVISER'S VIOLATIONS OF SECTIONS 206(3) AND 206(4) OF THE ADVISERS ACT AND RULE 206(4)-7 THEREUNDER.
Resolution
Order
Sanctions
Cease and Desist
Sanctions
Civil and Administrative Penalty(ies)/Fine(s)
Amount
$50,000.00
Sanctions
Disgorgement
Amount
$142,500.00
Sanctions
Monetary Penalty other than Fines
Amount
$3,235.21
Broker Comment
"SEC ORDER NO. 3-15627 SETTLED 8/6/2015. TRI-STAR ADVISORS, INC. PAID A CIVIL MONEY PENALTY OF $150,000 ON 8/17/15, WILLIAM T. PAYNE PAID A CIVIL MONEY PENALTY OF $50,000 ON 8/13/15 AND [THIRD PARTY] PAID A CIVIL MONEY PENALTY OF $50,000 ON 8/13/15. WILLIAM T. PAYNE NEITHER ADMITS NOR DENIES THE FINDINGS AND WILL COMPLY WITH THE ORDER."